Index Bias and the Structural Exclusion Risks Facing Digital-Asset-Focused Equities

The global equity market is undergoing a seismic shift as index providers like MSCI grapple with the classification of companies whose business models increasingly intersect with digital assets. At the heart of this debate lies MSCI's proposed 50% digital-asset revenue threshold, a policy that could redefine the eligibility criteria for firms holding significant portions of their balance sheets in cryptocurrencies like Bitcoin. This rule, currently under consultation until December 31, 2025, threatens to exclude companies such as Strategy and Marathon Digital from major benchmarks like the MSCI USA and Nasdaq 100 if their digital asset holdings exceed 50% of total assets according to MSCI's proposal. The implications of this policy extend beyond mere index reclassification, raising critical questions about market neutrality, structural mispricing, and the broader valuation of digital-asset-focused equities.

The Rationale for the 50% Threshold

MSCI's proposed threshold is rooted in the argument that firms with substantial digital asset holdings resemble investment funds rather than operating businesses. According to the index provider, such entities do not align with the traditional criteria for inclusion in core equity benchmarks, which prioritize companies generating revenue through operational activities. This rationale mirrors historical precedents where index providers have excluded entities deemed more akin to passive investment vehicles, such as real estate investment trusts (REITs) or closed-end funds. However, critics argue that this approach introduces a double standard. As noted by Strive Asset Management, MSCI has historically defined companies by their operational activities rather than balance-sheet composition, and applying such a rule selectively to digital assets undermines asset-class neutrality.

Criticisms and Counterarguments

The Bitcoin For Corporations (BFC) coalition and other industry stakeholders have challenged the 50% threshold as arbitrary and potentially destabilizing. They argue that the rule creates a binary distinction between firms with 49% and 51% digital asset holdings, despite the fact that operational activities remain largely unchanged across this threshold according to industry stakeholders. Furthermore, the volatility of digital asset prices introduces unpredictability into index composition. For example, a company's exclusion could hinge on short-term price swings rather than its long-term business model, leading to abrupt and artificial market corrections according to Strive's analysis. Strive has proposed an alternative: offering optional index variants for clients who wish to exclude digital-asset treasury companies, rather than redefining broad benchmark eligibility according to Strive's proposal.

Market Impact and Structural Risks

The potential market impact of MSCI's proposal is profound. Companies like Strategy, which holds over 649,870 BTC in its treasury, face an estimated $2.8 billion in passive fund outflows if excluded from major indices according to financial analysis. Such outflows could exacerbate downward pressure on share prices, particularly in a sector already prone to volatility. A JPMorgan analysis further estimates that the removal of Strategy alone could trigger $8.8 billion in outflows, with larger consequences if other index providers follow suit according to financial analysis. These risks are compounded by the fact that digital-asset-focused equities often trade at lower liquidity levels compared to traditional stocks, amplifying the potential for mispricing.

Structural mispricing is not a new phenomenon in equity markets, but the case of digital-asset-heavy firms introduces unique challenges. As highlighted by Fieberg (2024), abnormal returns in equities often stem from mispricing in small, hard-to-trade assets, frequently attributed to short positions according to research. However, in the context of digital-asset equities, long positions tied to size, volume, and distress have proven more significant, suggesting that traditional frameworks for analyzing mispricing may be inadequate according to research. This divergence underscores the need for revised analytical models to account for the interplay between index reclassifications and asset valuation.

Historical Precedents and Broader Implications

While the focus of MSCI's proposal is on digital assets, historical precedents in non-digital sectors offer instructive parallels. For instance, the reclassification of Vietnam by MSCI and FTSE from "frontier" to "emerging market" status is expected to accelerate foreign capital inflows but also raises concerns about mispricing due to regulatory and market volatility according to market analysis. Similarly, ESG index providers have faced criticism for excluding companies based on sustainability criteria, often leading to abnormal market reactions and reputational risks. These examples illustrate how index reclassifications can create both opportunities and systemic risks, particularly when driven by arbitrary thresholds or evolving regulatory frameworks.

Conclusion

MSCI's proposed 50% threshold represents a pivotal moment for digital-asset-focused equities. While the index provider aims to maintain the integrity of its benchmarks, the policy risks creating a fragmented market where valuation signals are distorted by arbitrary rules. The debate over this threshold also highlights a broader tension between innovation and tradition in equity markets. As digital assets continue to reshape corporate balance sheets and investor portfolios, index providers must balance the need for clarity with the imperative to avoid unintended market distortions. The final decision, expected in January 2026, will not only determine the fate of companies like Strategy but also set a precedent for how emerging asset classes are integrated into global financial systems.